RBI eases hedging norms for overseas borrowings to 70% from current 100%

The Reserve Bank of India (RBI) on November 26, 2018 eased the norms for External Commercial Borrowings (ECBs) by reducing the mandatory hedging provision to 70 percent from the current 100 percent.

What do you mean by ‘Hedging’?

‘Hedging’ refers to an investment process required to reduce the risk of adverse price or currency movements.

A borrower has to hedge in a manner that the projected cash flows match the expectation of the borrowers, irrespective of the fluctuations in the foreign currency.

The RBI also clarified that the ECBs raised prior to this circular will be required to mandatarily roll over their existing hedge only to the extent of 70 percent of outstanding ECB exposure.

The relaxed norms will apply to the ECBs with a maturity period between three and five years.

The relaxation in hedging is for Indian companies raising foreign currency-denominated ECBs under Track I of the ECB framework. The Track I refer to medium-term foreign currency-denominated ECB with a minimum average maturity of three to five years.

Note

The easing of hedging norms comes at a time when the economy faces liquidity issues, particularly among the Non-Banking Financial Companies (NBFC).

For the same purpose, the RBI had earlier eased hedging rules by reducing the minimum tenure for borrowing through the ECB route to three years from five years. It had also reduced the tenure required for exemption from mandatory hedging to five years from 10 years.

Significance

The move is likely to boost the local credit market.

It will increase the exposure of Indian companies borrowing abroad to fluctuations in the foreign exchange market.

The move will also help in improving dollar inflows into the economy at a time when some foreign currency deposits are likely to mature.

External Commercial Borrowings (ECB)

ECB is an instrument used to facilitate the access to foreign money by Indian companies, corporations and PSUs (public sector undertakings).

ECBs include commercial bank loans, buyers' credit, and suppliers’ credit, securitised instruments such as floating rate notes and fixed rate bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of multilateral financial Institutions.

ECBs cannot be used for investment in stock market or speculation in real estate.

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